The stock price of health benefits group Anthem is down more than 3.5% in 2022.
ANTM shares are likely to remain volatile as management prepares to release Q4 results on Jan. 26.
Long-term investors may want to consider buying the dip, especially if the stock falls towards $430.
Investors in the health giant Anthem (NYSE:) have seen returns of 36.9% over the past 12 months. However, the new year has started more modestly for ANTM: the share has fallen by 3.6%.
By comparison, the Index has gained 18.2% over the past year, but has fallen 6.4% so far. Meanwhile, the Index is up 31.5% in the past 52 weeks and has returned 3.4% YTD.
On Dec. 30, ANTM shares rose above $470 to hit an all-time high. But since then, the stock has lost nearly 5%. Anthem's 52-week range was $286.04 – $470.02, while its market cap is $108.4 billion.
Anthem, which provides health insurance, serves approximately 117 million people. It is one of the largest profitable managed healthcare companies in the US.
Management released robust financial figures at the end of October. Operating revenue was $35.5 billion, up 16% year over year. Adjusted earnings per share were $6.79 versus $4.20 in the third quarter of 2020. Cash and equivalents totaled nearly $5.5 billion.
About the results, CEO Gail Boudreaux said:
"The strong growth we saw in all of our benefits business in the third quarter demonstrates that our core offerings, as well as additional innovative products and services, continue to resonate in the market."
During the quarter, Anthem repurchased 1.2 million shares for $450 million. The weighted average price was $378.85. Meanwhile, management now expects adjusted earnings per share for 2021 to exceed $25.85. The health insurer will release its Q4 numbers on January 26 before the opening.
Before the release of Q3 stats, ANTM shares traded at $400, then hit a record high of $470.02 on Dec. 30. Now Anthem shares are around $447.10, while the current price supports a 1.02% dividend yield.
What to Expect from AnthemStocks
Of the 26 analysts surveyed via Investing.com, the ANTM stock has an outperform rating.
Analyst consensus estimates polled by Investing.com.
Chart: Investing.com
Analysts also have a median 12-month price target of $479.21 for the stock, representing an increase of about 7% from current levels. The 12 month price range is currently between $335 and $561.
Similarly, the average fair value for ANTM stock through InvestingPro is $572.31.
Source: InvestingPro
In other words, fundamental valuation suggests that stocks could rise by about 28%.
Meanwhile, we can look at Anthem's financial health as determined by ranking more than 100 factors relative to healthcare peers. In terms of profit and price momentum, it scores 4 out of 5 (top score). But cash flow and growth are at 3. Anthem's overall performance is rated "amazing."
Currently, the P/E, P/B and P/S ratios for ANTM stocks are 19.7x, 3.0x and 0.8x. By comparison, those stats for his peers stand at 10.5x, 1.4x, and 0.7x. Meanwhile, similar numbers for UnitedHealth Group Incorporated (NYSE:) – discussed here – are 28.2x, 6.2x and 1.6x.
As we have already noted, Anthem is expected to release Q4 stats next week. As a result, we expect ANTM stock to be choppy and potentially under pressure in the coming days. It could potentially slide to $430, after which it should trade sideways, possibly between $420 and $440. Adding ANTM stocks to portfolios
not concerned about volatility in the short term, might consider capitalizing on the declines. The target would be $479.21, which is the analysts' consensus expectation.
As an alternative, investors may want to consider purchasing an exchange traded fund (ETF) that has ANTM as an investment. Examples include:
iShares U.S. Healthcare Providers ETF (NYSE:)
Invesco S&P 500® Enhanced Value ETF (NYSE:)
T. Rowe Price Equity Income ETF (NYSE:)
First Trust Rising Dividend Achievers ETF (NASDAQ:)
Finally, those who have experience with options strategies and believe that Anthem stocks may fall even further during this earnings season may prefer to do a bear put spread.
Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average retail investor.
Bear Put Spread On Anthem Stock
$447.10
In a bear put spread, a trader has both a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Anthem here) and the same expiration date.
The trader wants ANTM shares to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited.
Here is an example:
For the first leg of this strategy, the trader can buy an at-the-money (ATM) or somewhat out-of-the-money (OTM) put option, such as the ANTM March 18, 2022, 440-strike option put. This option is currently offered for $18.10. It would cost the trader $1,810 to own this put option, which expires in less than two months.
For the second part of this strategy, the trader sells a put option, such as the ANTM March 18, 2022, 430-strike put option. The current premium of this option is $14.20. The option seller would receive $1,420 excluding trading commissions.
Maximum Risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread $3.90 ($18.10 – $14.20 = $3.90).
Since each option contract represents 100 shares of the underlying stock, we need to multiply $3.90 by 100, which gives us $390 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the Anthem stock price on expiration is above the strike price of the long put (or $440 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions. ]
So in our example, the difference between the strike prices is $10 ($440 – $430 = $10). And as we saw above, the net cost of the spread is $3.90.
The max profit is therefore $6.10 ($10.00 – $3.90 = $6.10) per share minus commissions. When we multiply $6.10 by 100 shares, the maximum profit for this option strategy is $610.
The trader will realize this maximum profit if the price of ANTM stock is at or below the strike price of the short put (lower strike price) on expiration (or $430 in our example).
Investors who have traded options before are likely aware that short put positions are typically assigned at maturity when the stock price is below the strike price (i.e. $430 here).
However, there is also the possibility of early allocation. Therefore, the position should be monitored until maturity. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $440 in our example) minus the net premium paid (i.e. $3.90 here) would give us the breakeven price.
In our example: $440 ? $3.90 = $436.10 (minus commissions).
Bottom Line
Long-term shareholders in Anthem stocks have seen excellent returns since the multi-year low in March 2020 at the start of the pandemic. The Street's consensus assessment for the new year is also bullish.
However, ANTM stocks started 2022 on a downward note. We may be able to expect volatility in the share price to continue as Anthem prepares to report its fourth quarter earnings. Later in the year, however, shares of the health insurer should start a new leg higher.
